Gratuity
Table of Contents
What is Gratuity?
Gratuity is given to the employees who have served the company for the number of years described in the Gratuity Act, i.e., a minimum of 5 years. The gratuity amount payable is determined based on the basic salary and DA of the employee. In case of the employee’s death, the amount payable to the employee is based on the number of service years in the company, the 5-year rule doesn’t apply in such cases. In simple terms, gratuity is a monetary appreciation for the services of the employee over the years in the organization.
Eligibility Criteria for Gratuity in India
Any employee must fulfill one of the following criteria to be eligible for receiving the gratuity:
- Employee has completed his tenure according to the company’s superannuation plan.
- If the employee is resigning or retiring from work after completing five years of continuous employment.
- In case the employee is physically disabled due to any sickness or accident.
- Employee dies due to any illness, in this case, the nominee becomes the receiver of the gratuity.
Gratuity Formula
Even though there are many formulas to calculate gratuity easily, it gets complicated to calculate it when it has to be calculated according to the payment of gratuity act 1972. As per this act, the payment of gratuity is categorized into 2 ways:
- When the employees are covered under the act.
- When the employees are not covered under the act.
Employees' gratuity calculation is different for both of these categories, and it is explained below with the help of gratuity calculation examples:
Gratuity Calculation Formula for employees who are covered under the act-
In order to calculate gratuity of employees who are covered under the act, you need to have their number of continuous employment years and the amount of their last drawn salary. Once you have these details, you can use the following formula:
Gratuity = Number of years in service * Last drawn salary * (15/26)
Gratuity Calculation Formula for employees who are not covered under the act-
There are a few companies that are not covered under the payments of gratuity act. But still, the employees of these companies are eligible to receive gratuity under gratuity conditions. In these cases, the gratuity calculation formula is slightly different, the number of working days will be 30 instead of 26. So the gratuity formula for such cases will be:
Gratuity = Number of years in service * Last drawn salary * (15/30)
Gratuity Calculator
| Particulars | Amount (in ₹) |
|---|---|
| Basic Salary + DA | |
| Years of Service | |
| Total Gratuity | |
| Exempted As Per Gratuity Act | |
| Taxable Gratuity |
Gratuity Calculation in case of the death of an Employee
In case an employee dies due to an accident or illness, their nominee will be eligible to receive gratuity from their organization, In such unforeseen circumstances the below-listed rates of gratuity will be paid by the organization:
| Sr No. | Employment Period | Amount of Gratuity |
|---|---|---|
| 1 | Less than 1 year | 2 times the employee's basic salary |
| 2 | More than 1 year but less than 5 years | 6 times the employee’s basic salary |
| 3 | More than 5 years but less than 11 years | 12 times the employee’s basic salary |
| 4 | More than 11 years but less than 20 years | 20 times the employee’s basic salary |
| 5 | More than 20 years | Half of employee’s basic salary * Half of employee’s employment tenure |
Income Tax on Gratuity
The amount of tax on gratuity completely depends on whether the employee is working in the private sector or the government sector.
- For government employees, the entire gratuity amount is exempted from tax.
- For private employees, a minimum of the following three amounts is exempted from income tax.
- Rs. 20 lakhs
- The amount of gratuity received
- Number of years in service * Last drawn salary * (15/26)
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FAQs
1. What kind of employees are covered under the Gratuity Act 1972?
Payment of Gratuity Act 1972 covers employees working in mines, factories, plantations, oilfields, ports, railway corporations, or other establishments related to them. It also includes all government jobs.
2. How many days will it take for an employer to process the gratuity amount?
Generally, the gratuity amount is released along with or just after the employee's full and final settlement is done. The government has made it compulsory for employers to pay the gratuity amount within 30 days.
3. Whom and how the employee nominee for the gratuity can be submitted?
According to the gratuity act, the employee should submit Form F for nomination within 30 days of completing one year of employment tenure. The employee can only nominate their family member, if they don’t have any family, they can only nominate someone else.
4. Is there any limit to the amount of Gratuity a Company can pay to their employees?
According to the act, a company can not pay any employee more than Rs.10 lakhs as gratuity, regardless of the number of years that the respective employee has completed in the company.
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